SEC Proposes Toughening Clearing Agency Requirements; Market Participants to Address Implications

The SEC proposed (i) amendments to current requirements on clearing agencies’ risk-based margin systems and (ii) a new rule on the content of clearing agencies' recovery and wind-down plans ("RWP"). On May 24, representatives from J.P. Morgan, Wells Fargo, Sia Partners and Fried Frank will address the implications of this rulemaking and the SEC's separate proposal on mandatory central clearing.

New Proposed Rule

The SEC's new proposal would amend Exchange Act Rule 17Ad-22 ("Standards for clearing agencies") by requiring a covered clearing agency to (i) utilize its risk-based margin system to monitor intraday exposures; (ii) implement policies and procedures that ensure reliable sources for price data and other "substantive inputs" to its risk-based margin system; and (iii) to establish policies and procedures for when substantive inputs are not readily available or reliable. In the event that the substantive inputs from third parties are not reliable, the SEC would require clearing agencies to receive input from an alternative source or risk-based margin system that does not rely on the unavailable or unreliable substantive inputs. The amendments would also authorize clearing agencies to make intraday margin calls, including for instances in which a clearing agency identifies elevated volatility in cleared products or a breach in its risk threshold.

The SEC is also proposing new Rule 17Ad-26. The SEC said that there are currently no requirements as to the content of the RWP plans required under Rule 17Ad-22(e). The SEC stated that the new rule is aimed at (i) bolstering existing RWPs, (ii) codifying existing elements in RWPs and (iii) ensuring that RWPs of new clearing agencies include all of the elements set forth in the proposed rule. Under the proposed rule, a clearing agency’s RWP would be required to:

• identify its critical payment, clearing and settlement services and how they would continue to be provided in the event of an RWP;
• identify service providers that a clearing agency relies on for providing critical services and how such services could be sustained during an RWP;
• address scenarios that may prevent critical payment, clearing and settlement services from being offered;
• identify criteria that would trigger implementation of a clearing agency’s RWP;
• describe the rules, policies and procedures that would be used to facilitate an RWP;
• outline procedures for notifying the SEC once the clearing agency begins to consider initiating a recovery or orderly wind-down; and
• outline procedures for testing every 12 months the clearing agency’s (i) capacity to implement its recovery and wind-down plans and (ii) review of its wind down plans by the clearing agency’s board of directors.

Comments must be submitted within 30 days of publication in the Federal Register or by July 17, 2023, whichever is later.

Virtual Seminar/CLE

On May 24, representatives from J.P. Morgan, Wells Fargo, Sia Partners and Fried Frank will host a complimentary virtual seminar on SEC's proposed rule changes that would require the majority of participants in the U.S. Treasury and Repo Markets to centrally clear secondary market transactions.

Click to Register

The panel will address how firms should prepare for operational and infrastructure challenges, risk trade-offs, and potential impact on liquidity. The discussion will also cover the views of market making firms.

Panelists

• Steven Lofchie, Partner, Fried Frank
• Toks Oyebode, Managing Director, J.P. Morgan
• James Wang, Managing Director, Wells Fargo
• Bradley Ziff, Senior Advisor and Operating Partner, Sia Partners

This program has been approved in accordance with the requirements of the New York State CLE Board for a maximum of 1.0 credit hour in Professional Practice.